The message is repeated over and over again: ‘Europe has to change because of the rise of China and India.’ To question it, as the majority of French people did in last year’s referendum and millions of Germans in the general election, is supposed to be like saying the Earth is flat. Growing industrial and agricultural output in one part of the world, it seems, necessarily means reduced consumption, longer working hours and worse pensions in another part. All the politicians who have told us for the last decade and a half that there is no alternative to capitalism now tell us that capitalism means European states cannot afford the welfare provisions granted when they were all producing much less in the 1950s, 1960s and early 1970s.

The message has an ideological purpose – to make people believe they have no alternative than to accept ever more draconian neo-liberal ‘remedies’ that cut into living standards, welfare benefits and working conditions in the West. But its impact relies on pointing to dramatic changes that are taking place in what were previously assumed to be ‘backward’ economies of little significance to the world system.

Where do these changes come from? What is their real extent?

What impact are they having on the established advanced capitalisms of Western Europe and the US? And how do they affect the ups and downs of the system as a whole? These are some of the issues this article tries to address.

The reality of rapid growth

There can be no argument about the massive industrial growth of China. It is something we have recognised repeatedly in this journal in the past. [1] Since 1978 China’s growth rate per year has been 9.5 percent. [2] Last year it became the world’s third biggest exporter, with 6 percent of the world total, and has also become the world’s biggest single recipient of fixed direct investment. It is ‘the leading producer in terms of output in more than 100 kinds of manufactured goods. China now makes more than 50 percent of the world’s cameras, 30 percent of the world’s air conditioners and televisions, 25 percent of washing machines and 20 percent of refrigerators. Some 85 percent of bicycles and 80 percent of shoes sold in the US are made in China’. [3]

Chinese cities like Beijing, Shanghai, Guangzhou or even Xian no longer bear much resemblance to Third World stereotypes. The forests of skyscrapers in Beijing or Shanghai make London’s much vaunted Docklands development look like Toytown, while the vast industrial developments around Shanghai have few comparisons in Western Europe, let alone Britain. And for the moment there seems no end in sight to the expansion of industry and cities. Some 40 percent of output flows back into investment, with cranes towering over new construction sites every 300 or 400 metres in the cities.

The Chinese economy is currently about 19 percent of the size of the US’s, measured in terms of current currency exchange rates. Some estimates suggest a figure of 60 percent measured according to ‘purchasing power parity’, which is based on domestic buying power. [4] The first measure considerably underestimates the level of resources available for consumption by China’s population (since domestic prices of basic foodstuffs like rice and basic services like urban transport fares cost a quarter or less than in the West), while the second overstates the value of the Chinese economy in terms of internationally traded capital goods, raw materials and consumer durables (which cost more or less the same inside China as in the West). [5] But whichever measure is taken, it is not fantasy to conceive of China’s overall output overtaking the US’s in the not so distant future if expansion continues at its present level – by the middle of the present century according to the Chinese government. On the other hand, it would be folly to ignore the strong possibility of economic crisis halting China’s ascent, just as it did Japan’s in the early 1990s.

In either case, China’s rise is producing a major shift in the balance of economic weight in the world system, and will inevitably have an enormous impact in the years ahead.

Simply bracketing India with China – as is done routinely in the media and in politicians’ speeches is, however, carrying the hype too far. India’s economy has grown more or less continually since independence 58 years ago, demolishing the claims of various dependency theorists that economic development of any sort is impossible under capitalism. [6] India’s manufacturing output today is 12 times that of 1951. Agricultural output is four times bigger, keeping ahead of population growth, so that continued malnutrition in wide areas of the countryside is a result of the impact of class on food distribution, not of underproduction. It is nonsense to say there is not development. But it is capitalist development. It is not the sort of all-round development, with everyone becoming better off, of neoliberal ideology. There are enormous differences between what happens to rich and poor, and between geographical regions. It is environmentally destructive and leaves hundreds of millions in poverty. That is what capitalist development is.

But the growth has been slower than China, varying enormously from year to year. Since 1978 it has varied only between 4 and 7 percent, barely touching the last figure in the last two years, despite hype from the World Bank which implies that ‘market reforms’ have made it the norm. The proportion of output going to investment in India has only in the last couple of decades reached the relatively high figure of 25 percent, and that is still way below the Chinese level. As a result, India’s output in purchasing power terms is only half that of China’s, and less than one tenth that of the US or of the combined EU countries. India remains 31st among the world’s exporters, with only 0.7 percent of the total (with roughly the same population, China is nine times more important for the world system), and India barely appears on the list of the world’s recipients of foreign direct investment (see graph 1).

India has some much-hyped advantages in computer and software services, back office processing tasks and call centres. Here the existence of millions of fluent English speakers puts it in a better position than China when it comes to providing for the needs of Western multinationals. But the scale of India’s impact on the world market for these things is vastly overstated in much media coverage. So the call centre industry in Britain is expected to employ four times more people than in India next year. [7] The growth of India’s software industries is constrained both by a growing shortage of skilled personnel (which has pushed up salaries) and infrastructural deficiencies when it comes to providing a secure environment for high-tech industry – something revealed vividly this year by the damaging impact of floods in the ‘high-tech capital’ of Bangalore. There are niches in which these industries are growing rapidly. But niches are not enough to lift a whole economy into the world’s big league. At present, even the most optimistic estimates suggest that such industries only provide employment for about 0.01 percent of India’s adult population.

The stages of Chinese growth

Chinese economic growth since the victory of the People’s Liberation Army in 1949 has gone through a number of stages:

(1) The early 1950s: The first, short, stage was that of reconstruction after 20 years of civil war and Japanese invasion. There was an improvement in the lives of the mass of people as communication routes were restored, industry began to function, and land reform reduced rents and redistributed land from landowners and bigger peasants to the middle and poor peasants. But power did not lie with the peasants, still less with the workers of the cities. Rather it lay with the radicalised middle classes who commanded the People’s Liberation Army – and they had a programme, like that of the members of the new middle classes who took power in the same period of the post-war decades right across the Third World, of wanting to turn their country into a modern industrial state, into a great power like any other.

(2) The 1950s and 1960s: The key was seen (again, as in many other Third World countries) to lie in following the apparently successful Russian approach, with the imposition of ‘plans’ which diverted resources towards new heavy industries – steel, cement, electricity. But doing so in a very poor, overwhelmingly agricultural country like the China of the early 1950s meant squeezing the living standards of the mass of the population. What the middle and poor peasants had gained through land reform, they lost through a rigorously enforced taxation of their output. When this was not enough to provide the resources for industrial accumulation and a growing arms budget, the Mao group within the regime turned to the ultimately disastrous attempt at collectivisation through so-called People’s Communes, in an attempt to bring about a ‘Great Leap Forward’. The leap failed miserably to build viable industries and actually cut total agricultural output, leading to famine in vast areas of the countryside and some 30 million deaths through starvation. In its aftermath, the ambition of total control over the peasants’ lives was abandoned. But the enormously high rate of exploitation of a heavily repressed peasantry persisted, and in the decades that followed an enormous proportion of total output was towards accumulation – some 30 or 40 percent. And this did, in the medium term, build up the heavy industry and arms (notably nuclear weapons) deemed necessary by those who wanted to rule a ‘great power’.

The new industry was, however, far from efficient. Again, as in many other Third World countries, a growth of heavy industry out of all proportion to what was happening to the rest of the economy led to acute shortages of inputs needed to keep plants running, and to the production of other goods which had no immediate use. There were massive swings between spells of fast industrial expansion and spells of near stagnation, and many of the grandiose new giant plants were only able to work at a fraction of their potential capacity.

By the mid-1970s a quarter of a century of what Marx called primitive accumulation had built up some of the bases of modern industry – but it was industry that was no match in terms of efficiency for that in many other parts of the world system.

The sheer scale of exploitation of the mass of the population led to all sorts of pressures building up from below and to repeated crises within the ruling group, which culminated in the massive upheavals of 1967-75 (from the ‘Cultural Revolution’ to the rise and fall of the ‘Gang of Four’), as Charlie Hore explains elsewhere in this journal. These were only finally resolved after Mao Zedong’s death in 1976 and the rise to power of Deng Xiaoping.

(3) From 1977 to 1989: A series of reforms pushed through in 1978–81 began with relief for peasants through a raising of the purchasing price paid by the state for their produce. The peasants were now to decide for themselves how to use some of the surplus left after (just about) feeding themselves. There was a huge rise in agricultural production, and the increased incomes provided a market for some of the under-utilised industrial capacity. A loosening of state controls allowed it to satisfy this demand, and overall output soared ahead.

Increasing social differentiation within the peasantry led some to accumulate a surplus, and then to use the new freedoms from state control to invest in establishing locally based ‘village industries’. Formally owned by village governments, in practice these provided a means of self-enrichment by those with connections to the local party apparatus. A new market capitalism grew up in the south east of the country alongside the old state capitalism centred mainly in the north of the country, and the regime allowed the new industries to link up with overseas Chinese capitalist interests in Hong Kong and elsewhere.

Despite the reforms, the surplus passing from the peasantry into the hands of three groups of capitalists (state, ‘village’ and overseas) was still massive, and low peasant incomes meant a ready supply of workers for the new industries, which did not even have to provide the guaranteed minimum living standards and social protection (the so-called ‘iron rice bowl’) of the old state-run heavy industries.

In effect, there was a new model of capitalist accumulation, combining the high level of exploitation and repression of the old state capitalism with a turn towards catering for markets – and the markets came from exporting to the rest of the world system, and from providing for the increasingly conspicuous consumption of the old state bureaucracy on the one hand and its children as they took over privatised industries on the other.

The new hybrid economy has contradictions of its own, with the ups and downs of a market capitalism superimposed on the ups and downs of the old state capitalist, primitive accumulation model. These contradictions led to a crisis in the late 1980s and the shock to the regime of the Tiananmen Square protests of 1989.

(4) 1992 to the present: The regime found a way out of the crisis by pushing village governments to privatise the new industries, which were encouraged to link up with foreign (and no longer just overseas Chinese) capitalists, as were the managers of the great state-owned enterprises. There has been a massive rationalisation of old industries, with perhaps 30 million workers losing their jobs. These measures have been acclaimed as ‘progressive’ by pro-capitalist economists right across the world. What they mean for workers has been portrayed graphically in the recent Chinese film Blind Shaft, about how the degrading conditions under which the miners work lead two of them to murder a co-worker in an attempt to blackmail corrupt managers. The closeness of reality to the fiction was shown in a mining disaster in Guangdong (supposedly China’s most ‘advanced’ province) last summer. As more than 100 miners suffocated underground, the owner fled when it was revealed he had paid out millions of dollars in bribes to take over the previously shut down state-owned mine, and at the same time to buy himself a senior position in the local police force. In this way he had been able to ignore all safety precautions while parading himself as an exemplary ‘entrepreneur’ for his role in supplying coal to satisfy the energy needs of a booming economy. [8]

Alongside the attack on the old working class has been a renewed upping of the level of exploitation of the peasantry, who still make up two thirds of the population. Average peasant incomes have probably declined in recent years. One (banned) Chinese study tells of a fall of 6 percent in peasants’ per capita farming incomes since 1997, and ‘given the rising costs of health and education, their real purchasing power has probably fallen still further’. [9] But the average does not tell the whole story. Class differentiation in the peasantry has proceeded apace, with the local officials using their powers to grab money (in the form of local taxes) and land off other peasants with the aim of enriching themselves as petty agrarian capitalists – the cause of many recent local near-uprisings. The World Bank admits that 204 million people, or one in six of the population, still live on less than $1 a day. Other estimates suggest that ‘the vast majority of the 800 million peasants’ have incomes at this level. [10] Some 100 million peasants pour into the cities each year seeking any sort of casual work they can get in competition with 30 million urban unemployed.

China-India contrasts

The pattern in India since independence in 1947 parallels that in China in some ways. The early years saw recovery from the (much less serious) dislocation caused by the Second World War. Then came the push to industrialise on the bases of five-year plans, inspired in part by the Russian model (but never going as far as China either in overriding the old private industrialists or in subordinating consumer goods to accumulation). Middle and poor peasants and workers paid the price for this in terms of stagnating living standards and, in many cases, permanent malnutrition (but without the sudden lunge into horrific starvation of the Great Leap Forward period). Finally, there were attempts from the late 1970s onwards to overcome a crisis in that model of accumulation by a series of market reforms and an opening up to the world market.

India started off with more industry than China, but accumulation in the 1950s to the 1970s never reached Chinese levels – it is only in the last decade or so that India’s rate of accumulation occasionally exceeded 25 percent. Partly this was because the relatively peaceful way the post-independence regime came to power in 1947 meant it never had the machine to confront old exploiting classes in the countryside. It bought them off rather than launching an all-out assault on them and diverting their incomes into accumulation. But it was also because it never had the strength simply to trample on the mass of middle peasants or the workers. Its governments relied on elections, but could not win elections without some concessions to the masses. And the one attempt at non-parliamentary rule – Indira Gandhi’s emergency in the mid-1970s – failed miserably. Hundreds of millions of peasants have suffered long-term malnutrition and some appalling caste oppression, but there has been nothing comparable to the famine of the Great Leap Forward years.

As a result India’s rulers achieved less than China’s during the phase of primitive accumulation, so find themselves less able to benefit from a turn to the world market today – exporting less and remaining much less attractive to foreign capital than their Chinese competitors.

Contradictions in China’s growth

Capitalism is a dynamic system. Those who have said capitalist development is not possible in parts of the Third World have failed to grasp this. But the other side of its dynamism is the contradiction that arises from expansion of production for the sake of production, from the ‘self-expansion of capital’ (sometimes rendered using the French term valorisation).

It has two inevitable results:

Investment grows much more rapidly than the number of workers employed and exploited – the source of surplus value. This produces a tendency for investment to grow more rapidly than profits, and for the ratio of profit to investment (the rate of profit) to fall.

Expansion produces goods that cannot be bought by a working population whose living standards are held down in an effort to sustain profit rates (‘overproduction’, sometimes seen as ‘underconsumption’). The only outlet for the increased production is then through investment in the expansion of means of production. This then leads eventually to further downward pressure on profit rates. Both factors are visible in China.

As we have seen, expansion has been based upon huge levels of extraction of a surplus from the peasants and workers, ie upon the poverty of a huge chunk of the Chinese population. The Chinese National Bureau of Statistics calculates that only 5 percent of the population are in the middle class that can afford the luxury consumer goods that industry is turning out. [11] This 5 percent amounts to some 60 million people, and can look very big when it crowds into the shopping districts of the major cities.

But it is not big enough to absorb the burgeoning output of Chinese industry profitably. Growth is therefore dependent on massive sales outside China. Exports accounted for 74 percent of Chinese growth in 2002. [12]

But there is enormous competition in export markets – not just with goods produced abroad, but with other goods produced in China itself. In many lines of business, different Chinese firms are now competing with each other – or, more accurately, are tied into competing international networks through the multinationals that are competing with each other: ‘The percentage of exports produced by foreign-based corporations grew from 17.4 percent in 1990 to 50.8 percent in 2001’. [13]

In many industries, firms (or, more often, foreign firms operating in China) are importing components from elsewhere in east and south east Asia, assembling them into final products in China and then exporting them to the US, Japan and elsewhere. But this does not stop competition leading to overproduction. The National Statistics Bureau has reported that ‘of all Chinese manufactured products, 90 percent are in oversupply’. [14] The pressure to sell these goods leads to massive price cutting on world markets: ‘Among Chinese companies the price war is particularly intense because competitors often chase market share rather than trying to increase shortterm profitability’. [15] The relentless downward pressure on the price of manufactured exports can be seen by the fall of prices in Western shops for Chinese-produced products like DVD players and recorders, breadmaking machines, cameras and air conditioners: ‘Relentless competition among local suppliers keeps profit margins almost invisible for many firms’. [16]

At the same time, ‘investment in many sectors – including property, cement, steel, cars and aluminium – is being overdone’, according to Chinese government officials. [17] Partly this is because the political apparatus has been constructed around the goal of accumulation for the sake of accumulation. Top managers measure their success by the speed at which their firms grow – and the government-run banks reward those that grow fastest by allowing them to accumulate debts.

The pressure also comes from the logic of competing in a capitalist world system where success does not only depend on cheap labour, but also on keeping up with rivals when it comes to new, capital intensive investment. There has been a decline in the number of new workers needed for each percentage increase in output. [18] Despite the cheapness of labour, China has lost a large number of manufacturing jobs in recent years – according to one estimate 15 percent, or 15 million, disappeared between 1995 and 2002, with falls in employment in 26 of 38 Chinese industries. [19] China is experiencing a rising capital-labour ratio (Marx’s organic composition) at the same time as a continual tendency to overproduction that can be relieved if ever increasing exports are sold for declining prices.

Stephen Roach of Morgan Stanley points out:

With private consumption having fallen to a record low of just 42 percent of GDP in 2004 and likely to have declined further in 2005 ... China’s growth dynamic has become increasingly reliant on exports and on the investment in infrastructure and factories required to build a state of the art export platform on a scale the world has never seen. Collectively, exports and fixed investment, which now account for over 80 percent of Chinese GDP, are still surging at close to a 30 percent annual rate. [20]

The result is a relatively low rate of profit which is compensated for by the willingness of the banks to lend to enterprises at low rates of interest – and by a parallel willingness not to push loss-making enterprises into bankruptcy, so that the banking system is owed vast, probably unrepayable debts. The official estimate for the ‘non-performing loans’ of the banks is 20 percent of all loans – an unofficial estimate suggests 45 percent of GDP. [21]

As with any capitalist boom, there is a burgeoning of all sorts of speculation. Everywhere in China’s major cities there is the apparently endless building and rebuilding of luxury apartment blocks, relatively expensive (by Chinese standards) fast food outlets, high class hotels, and shopping malls dedicated to selling designer products (even though such stores often seem virtually empty of shoppers).

The big question is the degree to which continued rapid economic growth is dependent on a speculative bubble which is bound sooner or later to burst. Capitalist booms can last longer than anyone really expects (apart from the most glib of pro-capitalist economists), but they can also collapse suddenly with little warning. So the Economist, for instance, has issued periodic warnings over the Chinese economy for at least the last decade (partly because the state plays too large a part in the economy for its neo-liberal fundamentalism) and has been proved wrong. Yet it is impossible for a capitalist economy to keep growing indefinitely if the real fundamentals in capitalist terms – the rates of profit of major sections of industry – are so weak. And this is an issue not just for the Chinese economy, but for the world system as a whole.

The US-China tango

It is precisely its interconnections with the world system which have enabled China to maintain its massive level of accumulation and to overcome past symptoms of crisis. Particularly important has been the ability of the US to absorb Chinese exports.

But the US has only been able to do this because of its ability to borrow ever-increasing amounts from the rest of the world. The country’s current deficit mushroomed from zero at the beginning of the 1990s to $400 billion in 2000 to close to $750 billion by the end of 2004. The gap has been filled by a continual inflow of foreign funds, coming mostly from east Asia, with China playing a very important role (although Japan still holds over three times as much US Treasury debt as China). [22] The Chinese banks take the surplus made on the country’s trade and use it to buy US treasury bonds, ie in effect they lend it to the US government which in turn passes some on to US banks to lend to firms and consumers. Or, to put it another way, China ‘saves’ about 50 percent of its national product as firms and the government extract profits, taxes and rents from the country’s workers and peasants – and then about 40 percent of GDP goes into domestic investment, and the rest (10 percent) is lent to the US via the Treasury bonds route. The final twist is that some of this flows back into China as investment by multinationals.

So the US economy holds the Chinese economy up by buying its excess production as imports, and the Chinese economy holds the US economy up by providing its firms and consumers with the cash to maintain their present level of consumption.

The US end of the arrangement is, like the Chinese end, a result of the contradictions built into capitalism. Various studies have shown that since the 1960s US firms have built up an ever-greater ratio of capital to labour – from 0.5 for manufacturing in 1982–90 to 2.2 in 1992–2000, according to a calculation by Robert Brenner. [23] There has been a downward pressure on the rate of profit which can only be overcome by increased exploitation of US workers, with real wages falling by nearly a sixth from their peak in the mid-1970s through to the mid-1990s, while working hours lengthened. [24] And the fall in real wages has made consumption increasingly dependent on borrowing. The American dream is increasingly one paid for on tick.

The recession of 2001–02 hit some US companies hard, and millions of industrial workers lost their jobs, never to regain them. But the recession did not have the positive effect for capitalism that crises have usually had in the past, of restructuring the economy so as to clear the way for a new period of sustained expansion. Instead recovery has depended on a deepening of one imbalance from the past, the ever increasing inflow of funds from abroad, especially east Asia, and the addition of a new imbalance, the excess of government spending over government revenues that results from the Bush administration increasing military spending while cutting taxes for the rich. There is now considerable fear in some capitalist circles that the economic recovery cannot last long, as poor profits threaten a giant like General Motors, high levels of middle class consumption depend increasingly on a bubble in house prices, and oil prices are raised to very high levels by the Chinese boom and the continual shutdown of most Iraqi supplies. [25]

What happens to the US and China is decisive for the rest of the world economy, since they are the only major parts of the system to experience strong growth in recent years. So China has played an important role in the recovery of the east Asian economies from the crisis of the late 1980s. It is the destination for around half the export growth of Japan, Malaysia, South Korea and Australia, and 30 percent of the total exports of the whole region. [26] In effect, the US is sucking in imports from China, and China is sucking in imports from the rest of east Asia. A related process has been taking place with Latin America. The Chinese boom has provided a massive market for raw materials and agricultural produce from the previously recession-hit economies of Brazil and Argentina, as well as for oil from Venezuela, reducing their dependence on the US and the European Union (each of which have imports of about $14 billion a year from Brazil). As the Financial Times said two years ago, ‘China was Argentina’s biggest export market in June and July, and Brazil’s exports to China jumped 136 percent’. [27]

If the interdependent booms in the US and China turn out to be no more than a double bubble that bursts, the impact on the rest of the system will be immense.

The challenges for European capitalism

The growth of China’s economy expresses itself in the growing importance of trade with the European Union countries, particularly when it comes to many basic consumer goods like electrical products and low cost clothing. However, the widely propagated notion that Chinese goods are already displacing European goods on a massive scale in the domestic market does not hold up. Imports from outside the European Union area still only account for about 10 percent of its total goods and services, and only 10 percent of these imports come from China. At the same time, Germany, not China, is the world’s biggest exporter for the moment (with $893 billion of exports in 2004, as against $583 billion from China and a mere $69 billion from India). The European Union’s combined exports to non-EU countries are nearly twice as big as China’s exports.

So the argument that ‘Europe must change’ does not hold water if by Europe is meant the mass of its people. There is no intrinsic reason why the increased output of China’s people should stop Europe’s people continuing to produce what they have in the past and to improve their living standards with advances in technology. But the present system is not organised on the basis of the needs of the mass of people. It is organised through capitalist firms, most of which use their national bases to engage in global competition, overriding national boundaries as they seek to expand their scale of production and their markets.

The discourse about ‘China and India’ is in reality about what the Europe-based firms need to do to expand globally. They want to discipline the workers in Europe who still make up most of their global workforces.

The prime competitors for European firms are not Chinese firms (although, if the present rapid pace of Chinese industry continues, some could be in a few years’ time). Particularly important are US firms; these have ratcheted up the level of exploitation of their domestic workforces over the last two decades.

This is most vividly shown by the hours worked in different countries. The US is the only advanced country where average hours worked per worker have risen in recent years. US, Japanese, Korean and Chinese workers all work 2,000 hours or more a year. In France and Germany the figure is around 1,500 hours. [28] In other words, workers in the core economies of mainland Europe work 10 or 12 weeks a year less than US and East Asian workers. This means that even when European bosses have invested in new technologies in advance of the US, and achieved higher hourly productivity rates, they lag behind in annual output per worker. (As I have pointed out before in this journal, while capital per worker and hourly productivity is higher in France and Germany than in the US, annual productivity is lower. [29])

The ‘China-India challenge’ talk is part of the response to this. It goes along with the threat, especially in Germany, to move production to cheaper labour sites in Eastern Europe if workers do not agree to work ‘more flexibly’ for longer hours.

Of course, there has also long been in operation a second response – that of physically moving production overseas. But this takes time with most sorts of industrial production (fully equipped factories are rarely easy to move, and even when they are there is then the question of energy supplies, transport facilities, a secure political environment, and so on). So it is that after 30 years of restructuring and factory closures, with a halving of the workforce, the output of manufacturing in Britain has not declined. Even when considering a long-term moving of production, in the interim the giant European firms still depend on finding some way to increase the exploitation of their local workforces. In practice few firms envisage, for the moment, moving all their production abroad, and this makes the need to raise the exploitation of the domestic workforce paramount.

Here, however, there is a political problem in what George Bush calls ‘Old Europe’. Capital and the state sought to legitimise themselves in the long boom after the Second World War through the ideology of national consensus while collaborating to various degrees with the trade union bureaucracy. This applied not only to social democracy in Germany and France, but also to the Christian Democrat and Gaullist variants of conservative politics. And there seemed no reason to disturb society by overturning this approach so long as economies seemed to be advancing in comparison with their major competitors – which they did, even into the 1980s. [30] But once this advance faltered there was a growing feeling among ruling class circles and their conservative and social democrat hangers-on that something drastic had to be done. Otherwise the only way to stop economic growth leading to pressure of wages on profits was to follow monetary and budgetary policies (encapsulated in the behaviour of the German national bank, the Bundesbank, and then in the rules of the European central bank) aimed at restricting economic growth the moment it gave any hint of being ‘inflationary’. The outcome has been a paradoxical situation in which Germany has a big trade surplus and German capital has good profits, but it suffers at the same time as slow growth reduces the share of world investment and production in its hands.

Hence also the Schröder government’s attempts in 2003–05 to push through its Agenda 2010 and Hartz IV counter-reforms. Hence too the repeated attempts in France from 1995 onwards to implement welfare cuts and neo-liberal policies (see Jim Wolfreys’ article in this journal).

There are some parallels between the dilemmas facing the French and German ruling classes and that facing Britain’s rulers from the mid-1960s onwards. Until then all mainstream parties had been agreed on the programme of social consensus, partnership with unions and Keynesian economics embodied in ‘Butskellism’ (a term coined by merging the names of the economics spokesmen of the two main parties). But as Japan and West Germany began to challenge British domination of export markets, establishment intellectuals began to bemoan ‘the Stagnant Society’ and ‘the suicide of Britain’, while City speculators made periodic raids on the currency. So began a long campaign by governments and employers to break the shopfloor strength constituted by the networks of rank and file trade union activists that had grown up over the previous 30 years. The first great manifesto of this campaign was the Donovan Commission Report into Industrial Relations of 1968. It was followed by the Labour government’s In Place of Strife (1969), the Tory government’s Fair Deal and Work (1970), and many subsequent proclamations. But it was not until the defeat of the yearlong strikes of miners and print workers under Margaret Thatcher’s government in the mid-1980s that the battle was finally won for the ruling class – and in the interim three governments had been broken by their inability to impose capital’s will on the workforce.

The parallel points to the scale of the problems facing the French and German ruling classes. Even if they can find some politician with the political legitimacy to wage the battle as Thatcher did (and the French attempt with the referendum and Merkel’s approach in the German election seriously backfired), they can still find themselves stirring up opposition forces capable of beating them back – it is worth remembering what a ‘close run thing’ Thatcher’s victory in 1984–85 was. In the meantime, their attempts to go onto the offensive can destabilise the politics of the two most important states in mainland Europe.

The pattern so far is of them going on the offensive, stirring up resistance against themselves – and then losing the initiative (and their nerve) and having to undertake the sort of partial retreat that gives increased confidence to sections of the resistance.

Tony Blair has attempted to benefit politically from the problems of the French and German political establishments, trying to present himself as a man of destiny for capitalism across the whole of Europe. So he tried to thrust himself to the fore with the Lisbon declaration pushed by the BBA trio (Blair, Berlusconi and Aznar) three years ago, and then tried to go centre-stage after the French and German votes, looking to a new alliance with Merkel in Germany and Sarkozy, who he hopes will be president of France after next year’s election.

The British government has the advantage over the European ones of having inherited the defeats inflicted on organised labour by Thatcher. This did not just involve a humbling of the union leaders and an immense weakening of shopfloor resistance. It also involved cuts in expenditure on social housing and public transport, the abolition of wage-related unemployment benefits, the pioneering use of market testing to hit the conditions of civil servants, the use of contracting-out to hit the worst paid sectors in the health service, and driving down the real value of the state pension.

Yet for all the Blairite-Brownite boasts about the advantages in terms of the ‘flexibility’ of the British economy, the record in capitalist terms is not all that brilliant. Productivity lags 10 or 15 percent behind the US, and working hours are still shorter than in the US, even if longer (by about an hour a week) than in France and Germany. And the ‘flexible labour market’ has not been enough to bring about the fall in real wages that has occurred in the US. [31] This may be connected with the fact that the official unemployment figures conceal the way in which very large numbers of people who are out of work have been moved onto invalidity benefit – a device used to massage the unemployment figures which also serves to reduce the pressure on the ‘reserve army’ of the employed section of the working class. (Tellingly, the proportion of GDP absorbed by public sector expenditure remains at around 40 percent. [32])

So it is that, at the same time as taking the neo-liberal moral high ground against ‘Old Europe’, Blair and Brown feel compelled to try to push through still more measures of a neo-liberal sort at home – and with them measures like city academies and attacks on civil liberties that give right wing ideological signals even if they can hardly do much directly to solve British capitalism’s competitive weaknesses. But theirs is a government weakened by following Bush into the morass of Iraq and which can, like the European states, find itself compelled to back off, at least partially, in the face of real resistance. This was shown by the way Blair did not, at the end of the day, want to take on the risks involved in trying to impose an across the board increase of the pensionable age to 65 for the whole public sector. It was only the pessimism and cowardice of the trade union leaders that allowed the government to get away with raising the pensionable age for newly employed workers. And even then Blair had to endure attacks from his friends in the right wing press on his ‘weakness’ and his ‘surrender to union power’.

Emerging faultlines

There is a tendency for people to ask of any analysis of the world economy, ‘What follows next – boom or slump?’ or, even more bluntly if they are on the left, ‘When will the bubble burst?’

I have no doubt that at some point the double bubble will burst. But no one can predict when – the sheer complexity of a world system involving the interaction of a score of major states, a thousand major multi-nationals and tens of thousands of medium-sized firms makes any scientific judgement as to the timing and amplitude of its ups and downs impossible.

For the moment, however, we can see some of the necessary political impact of what has been happening. This is because any capitalist boom (a bubble or otherwise) brings about enormous material changes to the substructure of the system. Industries expand and output rises – massively in the Chinese case. Some capitalists – and the states they rely on – find themselves strengthened, others weakened. New competitive pressures hit firms and states, and toss some asunder. Political adventurers emerge who promise to bring about a new stability by pursuing aggressive policies abroad or by tearing up the old compromises with exploited classes at home. Such political effects are bound to be especially strong when boom in two parts of the world is accompanied by stagnation elsewhere.

It is this interaction of economics and politics which explains the three current faultlines in the world system:

The morass in which the US finds itself in Iraq: There is only one coherent explanation of the Bush-Rumsfeld adventure in invading Iraq and then trying to occupy it with a mere 130,000 troops – the feeling of major sections of the US ruling class that an opportunity existed to use the sheer weight and technical superiority of US weaponry to assure US hegemony in the face of potential challenges in the decades ahead. [33]

There have been and will continue to be divergent interests between European capital and US capital. The fact that European multinationals operate inside the US, and US multinationals inside Europe, does not alter the reliance of each on states to fight for the international interests – hence the hard bargaining between them in the World Trade Organisation. And the growing interaction in terms of markets between China and the US does not prevent US capital from wanting its state to have the power to dictate the terms on which this interaction takes place (as in the pressure on China to revalue its currency still more). Hence the debate within the US political establishment over whether China is to be treated as a welcome ‘strategic competitor’ or a potentially hostile ‘strategic rival’ which might have a bigger economy than the US in a couple of decades time.

Seizing physical control of the heart of the world’s biggest oil producing region seemed an easy way of warding off such threats to hegemony – especially since Europe, Japan and China are more dependent on Middle East oil than is the US. But, by the same token, the failure to crush resistance in Iraq and establish a stable puppet regime now means US global hegemony is much weakened, with increasing divisions inside the US ruling class over how to deal with a crisis in many ways worse for it than that created by the Vietnam War in the early 1970s.

The rising insurgency in Latin America: The overthrow of governments by popular uprisings in Argentina, Ecuador and Bolivia grew out of spontaneous eruptions of anger by the popular classes at the effects of economic crisis and neo-liberal policies. So has the upsurge of struggle from below that has defeated the three attempts to remove Chavez in Venezuela. The weakening of US hegemony caused by the Iraq morass now makes it difficult for it to intervene to restore capitalist stability in what it has always regarded asits backyard. At the same time the major South American governments are now taking advantage of this weakening, of their increased economic links with China, and of divergences between the US and Europe to buy off popular discontent with nationalist rhetoric and increase the leverage of certain national capitalist interests within the world system. The beef and sugar barons of Brazil have joined with their fellow capitalists in insisting that Lula follows a neo-liberal domestic agenda, but they have no problem with him taking advantage of the weakening of US hegemony in the fight to gain greater access to US markets. Hence talk at the time of the Summit of the Americas in Argentina of the US ‘losing the plot’ in Latin America.

The crisis of the European governments: Three years ago, resistance to the neoliberal policies being pushed through by governments expressed itself in one-day general strikes or public sector strikes in Spain, Italy and Portugal. Now the French European constitution referendum and the German election results have brought political instability to the heart of Europe. We are in for a long period of social and political turmoil as Europe’s capitalists attempt to cope with increased global competition by taking away from the working classes what they conceded to them to buy class peace in the past.

The China-US syndrome also points to the possible emergence of yet another faultline. If the double bubble were to burst it would have profound political effects inside both countries. It would shake still further a Bush administration already in deep trouble because of Iraq. And it would profoundly weaken the ability of the Chinese ruling class to contain the growing, but still fragmented, struggles within the peasantry and the working class, and make possible a new – but bigger and more explosive – Tiananmen Square.

But even short of this, those who run the world system are in for a rough ride. They will respond, as they always have in the past, with a mixture of fine words and the most barbaric practices. All sorts of opportunities are opening up for those of us who are battling against the system – but the most terrible dangers if we do not take advantages of those opportunities.

Notes

2. Figures given in M. Hart Landsberg and P. Burkett, China and the Dynamics of Transnational Accumulation, paper given at conference on The Korean Economy: Marxist Perspectives, Gyeongsang National University, Jinju, South Korea, 20 May 2005.

5. For a critique of the use of parity purchasing power measurements see, for instance, J. Studwell, The China Dream (London 2002), pp. 160–162.

6. See my criticisms of such theorists in Where is Capitalism Going? Part Two, as above, and in Analysing Imperialism, International Socialism 99 (Summer 2003). For India, see my India: A Rough Guide, International Socialism 103 (Summer 2004).

22. From year end 1997 to year end 2004, China’s foreign exchange reserves (invested heavily in US Treasury securities) rose from $143 billion to $578 billion, South Korea’s from $20 billion to $199 billion and Japan’s from $220 billion to $834 billion, according to Robert J. Samuelson, Newsweek, 21 March 2005.

28. These are figures for full time workers – including part time workers reduces the yearly total for all countries.

29. See C. Harman, Beyond the Boom, as above, p. 49. My source was Samuel Brittan of the Financial Times. There are various measures of labour productivity and levels of investment. Duménil and Levy in Resurgent Capital (London 2004) show labour productivity per hour in Europe still slightly behind that in the US, but investment per worker ahead. Andrew Glyn (Global Balances, New Left Review 34, July–August 2005) shows productivity in Europe well behind that in the US. But the differences in calculations do not alter the basic point about hours and exploitation.

30. Duménil and Levy show the Europeans catching up with the US in terms of productivity, but losing their advantage in terms of growth rates from the mid-1970s onwards. See Duménil and Levy, Resurgent Capital, as above, graphs on pp. 31, 40 and 56.

31. For an excellent summary of what has happened in US, see M.D. Yates, A Statistical Portrait of the US Working Class (a review of State of Working America), written by economists at the Economic Policy Institute in Washington, DC) in Monthly Review, April 2005.

33. There was a sense within the US political establishment right through the 1990s, as expressed in the utterances of Kissinger and Brzezinsky, that they lacked a clear strategy for maintaining their hegemony – for some details see my article Analysing Imperialism, as above.